Non-US Banks Gained from Fed Crisis Fund

Some of the world’s strongest banks have profited from an emergency credit facility set up by the US Federal Reserve to shore up confidence in the global financial system, according to a Financial Times analysis of data released by the Fed.

More than half of lending under the Fed’s term auction facility – the largest of its crisis programs – went to foreign banks. Details of the varied uses to which they put it may add to political criticism of the Fed.

The Taf was set up in December 2007 to provide one-month loans to creditworthy banks as markets dried up for lending longer than overnight. In August 2008, it began offering three-month loans as well.

Rabobank of the Netherlands and Toronto-Dominion of Canada, two of the only banks in the world with triple A credit ratings, used more than $20 billion in cumulative Taf loans.

Ed Clark, TD chief executive, said that using Taf was logical even though his bank never had a liquidity problem. “That wasn’t how we made a lot of money. But you make a dollar here, you make a dollar there. What’s the spread you make on a billion dollars?” he said.

In the summer of 2008, TD was borrowing $1 billion from TAF at rates of between 2 and 2.5 percent. For that borrowing it used the lowest quality – and hence highest yielding – collateral acceptable to the Fed.

More than 80 percent of its collateral had a triple B credit rating at a time when such bonds yielded about 7 percent. TD could therefore have made a notional gross spread of about $4m a month during 2008.

Mr Clark said the authorities were encouraging healthy banks to use schemes such as the Taf so as not to stigmatize their weaker counterparts. In January 2008, Ben Bernanke, the Fed chairman, said the Taf appeared to be succeeding because “there appears to have been little if any stigma”.

“You go through the whole crisis and there were lots of things we did that weren’t necessarily economic but were the right thing to do for the system,” said Mr Clark. “So I’m not embarrassed by this at all.”

Rabobank said it used the Taf only “in case the situation on the financial markets would further deteriorate” but it still had $5 billion in outstanding loans as late as January 2010.

The Fed declined to comment, but has pointed out that all of its emergency credit was repaid in full with interest, and that its goal was to provide liquidity.

Korean banks, including Hana Bank, Korea Development Bank, Industrial Bank of Korea and Shinhan Bank, were also among the most enthusiastic posters of triple B collateral to the Taf.

One Korean bank official said: “It was the best option we had for raising foreign capital during the financial crisis.”